Employment Contract

Definition:An agreement entered into between an employer and an employee at
the time the employee is hired that outlines the exact nature of
their business relationship, specifically what compensation the
employee will receive in exchange for specific work performed
.

Hiring employees is a fairly straightforward task--at least,
most of the time. Most states assume an "at will" relationship,
under which you can terminate an employee at any time for any
reason or no reason. (Or alternately, your employee can quit for
any reason.) But there are circumstances under which employment
contracts make sense.

First, the advantages. An employment contract can help you
attract and retain key employees. While you can't force employees
to stay, a contract can ensure that they'll provide reasonable
notice prior to departure--typically 60 to 90 days.

Employment contracts also help protect critical trade secrets,
and are especially critical in high-tech companies. An employment
contract can prohibit employees from revealing company secrets,
working for the competition or soliciting customers. Noncompete
agreements can be difficult to hold up in court, so you must be
careful in drafting them. Because it's anticompetitive to prohibit
people from earning a livelihood in their field, courts generally
will enforce noncompete agreements only if they're reasonable. You
can't prohibit employees from ever working for a competing business
anywhere in the country, but you might be able to enforce an
agreement that they not work for a competing business within a
30-mile radius of your company for two years, or that they not
solicit your company's customers for a year.

Employment contracts are also useful when you're buying or
selling a business to make sure key people don't leave. You can
offer employees a retention bonus for staying or let them know
they'll be forfeiting a valuable severance package if they
leave.

Contracts also clarify individual jobs by spelling out
employees' responsibilities, compensation, bonuses, stock options,
rights to any inventions and patents, expense accounts and more.
You can include an "evergreen" clause stating that the contract
automatically renews on a given day each year if neither side
provides notice of termination. And an arbitration clause can
ensure that any employment-related dispute will be subject to
binding arbitration rather than played out in court, which can be
expensive and time-consuming.

Now the downside. Employment contracts change the "at will"
relationship, restricting your ability to terminate employees who
aren't working out. Typically you agree only to terminate "for
cause" unless you're at the end of the contract term, which opens
your decision to second-guessing by the courts as to whether your
cause was adequate.

If you draft an employment contract, pay special attention to
the termination section. You might want a clause denying certain
benefits if you terminate for cause--such as committing a felony or
acting in a way that's clearly harmful. Some employees might
negotiate "double trigger" clauses, in which they can resign "for
good reason" (such as being reassigned to another department) and
still be entitled to a severance package.

Given the complexity and issues involved, you can understand why
employment contracts are usually reserved for key employees.
Certainly, always consult your attorney about clauses to include
and avoid.